Development of Small and Medium Enterprises Law

Policy and declared objectives

Section 2 declares State policy to promote, support, strengthen and encourage the growth and development of small and medium enterprises in all productive sectors, particularly rural/agri-based enterprises.
Section 2 directs the State to spur small and medium enterprise growth nationwide and attain countryside industrialization through:
- Establishing an adequate support structure and an environment conducive to viability.
- Creating mechanisms for access and transfer of appropriate technology.
- Intensifying and expanding entrepreneurship and skills training programs.
- Facilitating access to sources of funds.
- Assuring access to a fair share of government contracts and related incentives and preferences.
- Complementing financing programs and doing away with stringent and burdensome collateral requirements.
- Instituting safeguards for credit delivery stability.
- Raising assistance efficiency at the least cost.
- Promoting linkages between large and small enterprises and encouraging common service facilities.
- Making the private sector a partner through private voluntary organizations, viable industry associations, and cooperatives.
- Establishing a feedback and evaluation mechanism to monitor economic contributions, bottlenecks, and environmental effects.

Definitions and classification thresholds

Section 3 defines “small and medium enterprise” as any business activity or enterprise engaged in industry, agribusiness and/or services, whether single proprietorship, cooperative, partnership or corporation, whose total assets meet specified thresholds.
Section 3 computes total assets by including assets inclusive of those arising from loans but excluding the land on which the enterprise’s office, plant and equipment are situated.
Section 3 sets these asset categories:
- Micro: less than PHP 50,000
- Cottage: PHP 50,001 – PHP 500,000
- Small: PHP 500,001 – PHP 5,000,000
- Medium: PHP 5,000,001 – PHP 20,000,000
Section 3 provides that, in a generic sense, all enterprises with total assets of PHP 5,000,000 and below are called small enterprises.
Section 3 authorizes the Small and Medium Enterprise Development Council to review and adjust the definitions for inflation and other economic factors.

Who may receive government assistance

Section 4 provides that qualifying businesses must meet all eligibility conditions to receive assistance, counseling, incentives and promotion under Republic Act No. 6977.
Section 4 requires that eligible enterprises must be duly registered with appropriate agencies under existing law; for micro enterprises, registration with the office of the municipal or city treasurer is deemed sufficient.
Section 4 requires ownership/capital structure:
- For single proprietorship or partnership, the enterprise must be one hundred percent (100%) owned and capitalized by Filipino citizens.
- For a juridical entity, at least 60% of capital or outstanding stocks must be owned by Filipino citizens.
Section 4 requires that the enterprise be primarily engaged in manufacturing, processing, and/or production, excluding farm level agricultural/crop production.
Section 4 bars eligibility where the enterprise is a branch, subsidiary or division of a large scale enterprise, or where its policies are determined by a large scale enterprise or by persons who are not owners or employees of the enterprise.
Section 4 permits an eligible small and medium enterprise to accept subcontracts from large enterprises or join in cooperative activities with other small and medium enterprises even with the above bar.

Governing principles for implementation

Section 5 requires government agencies to pursue minimal set of rules and simplification of procedures and requirements, ensuring stability of rules and encouraging entrepreneurial spirit.
Section 5 mandates that agencies minimize procedural rules and requirements in registration, availment of financing, and access to other government services and assistance.
Section 5 encourages the private sector to assist implementation by policing their ranks and participating strictly in accordance with law and in line with the Act’s purposes.
Section 5 calls for encouragement of small and medium enterprise industry associations at local and regional levels, preferably unified under a national federation/association.
Section 5 directs coordination of government efforts through appropriate offices of multiple departments and agencies, including:
- Departments of Trade and Industry, Finance, Budget and Management, Agriculture, Agrarian Reform, Environment and Natural Resources, Labor and Employment, Transportation and Communication, Public Works and Highways, Science and Technology, and Local Government
- National Economic and Development Authority and Central Bank of the Philippines
Section 5 accelerates decentralization by establishing regional and provincial offices to enhance service and implementation, with substantial delegation of authority for:
- Decisions on registration of beneficiaries
- Decisions on qualification for benefits
- Accreditation of private voluntary organizations, industry associations and cooperatives
- Resolution of complaints for violation of applicable laws

SMED Council: creation, structure, functions

Section 6 creates the Small and Medium Enterprise Development (SMED) Council to spur growth and carry out the Act’s policy.
Section 6 attaches the Council to the Department of Trade and Industry and requires constitution within sixty (60) days after the approval of the Act.
Section 6 names the Council as the primary agency responsible for promotion, growth and development of small and medium enterprises through facilitating and closely coordinating national efforts, including:
- Assisting relevant agencies in tapping local and foreign funds
- Promoting the use of existing guarantee programs
Section 7 provides the Council chairmanship and membership:
- The Secretary of Trade and Industry is Chairman.
- Members include: Director General of NEDA, Secretary of Agriculture, Secretary of Labor and Employment, Secretary of Environment and Natural Resources, Secretary of Science and Technology, Chairman of Small Business Finance and Guarantee Corporation, Chairman of the small and medium enterprises promotion body to be established under the Act, and three (3) private sector representatives (all Filipino citizens) representing Luzon, Visayas and Mindanao, appointed by the President, with one from the banking industry.
Section 7 allows Cabinet-rank ex officio members to designate an undersecretary or assistant secretary as permanent representative when they fail to attend.
Section 7 sets private sector per diem at PHP 1,000.00 per meeting initially.
Section 7 requires the Department of Trade and Industry to allocate PHP 5,000,000.00 out of savings for initial operating expenses, after which the Council budget is included in the annual appropriation of the Department.
Section 7 allows the Council to call upon participation of any government agency or association of local government officials when directly or indirectly concerned with small and medium enterprise growth in any area or manner.
Section 8 assigns the Council powers and duties, including policy recommendations, comprehensive development planning integration into NEDA plans, coordination of activities, review of policies affecting the sector, monitoring progress of agencies (including cottage and micro firms with local government units and private sector groups), and promulgation of implementing guidelines and operating principles.
Section 8 authorizes the Council to ensure productivity and viability through directed or assisted services and programs covering:
- Business and technical training, skills upgrading
- Labor-management guidance and working conditions improvement
- Product quality/product development and diversification
- Adoption of improved production techniques and commercialization of technologies and increased utilization of indigenous raw materials
- Marketing and distribution assistance, including local supply-demand information, industry/provincial profiles, overseas promotion, domestic market linkage, and common service facilities (including bonded warehouses, grains storage, agro-processing and drying facilities, ice plants, refrigerated storage, cooperative trucking facilities)
- Credit access through a simplified multi-agency financing program; other financing modes including leasing and venture capital; credit guarantee systems and formation of credit guarantee associations; credit records and information systems; and decentralization of loan approval mechanisms
- Concessional interest rates and lower financing fees, including incentives for prompt payments, amortization tied to business cash flows, and substitution of government guarantee cover for lack of collateral
- Bankruptcy preventive measures through a mutual relief system for distressed enterprises and insurance against extraordinary disasters
- Information dissemination and entrepreneurship education
- Access to tax credits and other tax and duty incentives under the Omnibus Investment Code and other laws
- Support for product experimentation, research and development activities, and access to information on commercialized technologies
- Provision of infrastructure and public utilities to support operations
Section 8 requires submission of a yearly report to the President and Congress on the status, progress, and impact of relevant policies, programs, legislation, and private sector activities.
Section 8 tasks the Council to assist in establishing modern industrial estates outside urban centers.

Council Secretariat and rationalization actions

Section 9 designates the Bureau of Small and Medium Business Development of the Department of Trade and Industry as Council Secretariat, in addition to its existing activities.
Section 9 requires the Secretariat to:
- Prepare and recommend annual and medium-term small and medium enterprise development plans for Council approval, in coordination with local government units and/or associations of local government officials
- Coordinate position papers and background materials for Council discussions or approvals
- Assist in coordinating and monitoring small and medium enterprise policies and programs of all government agencies
- Prepare, collate and integrate inputs to the Council’s yearly status report
- Submit periodic reports to the Council on progress and accomplishment
- Perform ad hoc functions as authorized by the Council
Section 10 requires the Council, within one hundred eighty (180) days from establishment, to recommend measures to rationalize and integrate all government programs for small and medium enterprise promotion and development under a unified institutional framework.
Section 10 empowers the President to establish a small and medium enterprise promotion body as the principal government agency for non-financing programs, including fee-based services, to support and promote micro, small and medium enterprises.
Section 10 attaches the promotion body to the Department of Trade and Industry and places it under the policy, program and administrative supervision of the SMED Council.
Section 10 mandates that the promotion body receives no less than fifty percent (50%) of the assets and budgetary allocations of agencies for promotion, development and financing of small and medium enterprises that are dissolved/abolished and absorbed/incorporated/integrated into the SMED Council.

Small Business Guarantee and Finance Corporation

Section 11 creates the Small Business Guarantee and Finance Corporation (SBGFC) as a body corporate.
Section 11 provides that the SBGFC shall provide, promote, develop and widen alternative modes of financing for small enterprises, including direct and indirect project lending, venture capital, financial leasing, secondary mortgage and/or rediscounting of loan papers, and secondary/regional stock markets.
Section 11 prohibits crop production financing from being serviced by the Corporation.
Section 11 authorizes the SBGFC to guarantee loans obtained by qualified small enterprises, local/regional associations, private voluntary organizations and/or cooperatives, under terms and conditions set by its Board.
Section 11 authorizes guarantees up to one hundred percent (100%).
Section 11 authorizes second-level guarantees (re-insurance) on credit/investment guarantees of credit guarantee associations and other institutions supporting small entrepreneurs.
Section 11 makes the SBGFC liable under guarantees upon proof that a loan became past due under terms and guidelines adopted by its Board and printed on the contract of guarantee.
Section 11 attaches the SBGFC to the Department of Trade and Industry, under SMED Council policy, program and administrative supervision.
Section 11 sets the principal place of business in Metro Manila and directs the Corporation to endeavor to have one or more branch offices in every province.
Section 11 requires general corporate powers under the Corporation Code when incidental or conducive to Act objectives.
Section 11 sets the SBGFC Board composition at five (5) members:
- Three (3) private sector members appointed by the President upon recommendation of the SMED Council; the Board Chairman is appointed by the President to serve full-time
- The Secretary of Trade and Industry or Undersecretary
- A representative of the five (5) government financial institutions mandated in the Act to provide initial capital, designated under guidelines agreed upon by Board Chairmen.

Capitalization, mandatory credit allocation, and sanctions

Section 12 provides SBGFC authorized capital stock of Five billion pesos (P5,000,000,000.00).
Section 12 sets initial capital at One billion pesos (P1,000,000,000.00), funded through equity investments in common stocks by:
- Land Bank of the Philippines (LBP): PHP 200,000,000.00
- Philippine National Bank (PNB): PHP 200,000,000.00
- Development Bank of the Philippines (DBP): PHP 200,000,000.00
Section 12 requires the Social Security System (SSS) and Government Service Insurance System (GSIS) to set aside PHP 200,000,000.00 each and place them in preferred stocks of SBGFC.
Section 12 allows additional funding from trust placements of excess and unused funds of existing government agencies, bilateral and multilateral official development assistance funds, subscriptions from government-owned or controlled corporations, and investments of private financial institutions and corporations.
Section 13 mandates that all lending institutions as defined under Central Bank rules (public or private) must set aside a portion of their total loan portfolio based on balance sheets as of the end of the previous quarter and make it available for small enterprise credit.
Section 13 sets the mandatory allocation schedule:
- at least 5% by end of the first year
- 10% (stated as “ten percent (101%)”) by end of the second year through the end of the fifth year
- 5% by end of the sixth year
- may come down to zero by end of the seventh year
Section 13 provides that Central Bank in consultation with the Council shall formulate rules for effective implementation.
Section 13 states that purchase of government notes, securities, and other negotiable instruments (except instruments offered by the SBGFC) is not deemed compliance with the mandatory allocation.
Section 13 requires the SMED Council to set up systems to monitor all loan applications of small enterprises to account for the absorptive capacity of the small enterprise sector.
Section 13 requires the Central Bank to furnish the SMED Council semestral basis regular reports on lending institutions’ compliance.
Section 14 directs the Central Bank to impose administrative sanctions and other penalties on lending institutions for non-compliance.
Section 14 imposes individual criminal liability for erring lending institutions: the President, members of boards of directors, and other officers are individually liable for imprisonment of not less than six (6) months and a fine of not less than Five hundred thousand pesos (P500,000.00) each.

Separability, repeals, and consolidation

Section 15 declares the provisions of Republic Act No. 6977 separable, with the remainder of the Act continuing in full force if any provision is held unconstitutional.
Section 16 repeals or modifies laws, executive orders, rules and regulations, or parts thereof, that are inconsistent with Republic Act No. 6977.
Section 17 states that Republic Act No. 6977 takes effect upon approval.